OPEC -NON OPEC, WILL WORLD OIL DEMAND GROW AT HEALTHY LEVELS IN 2017?

VIENNA. On 30th November 2016, the 171st Meeting of the Conference of the OPEC was held in Vienna under the Chairmanship of its President, HE Dr. Mohammed Bin Saleh Al-Sada, Minister of Energy and Industry of the State of Qatar and Head of its Delegation. As OPEC meets twice a year, the Conference decided that its next Ordinary Meeting will convene in Vienna, Austria, on Thursday, 25th May 2017. The OPEC has been a major player on the world economic stage for decades. The organization has had a significant impact on oil prices since the 1960s and has often been blamed by some in the West for high gas prices.

Although most people have heard of OPEC, very few completely understand who they are and what they do. Let’s take a look at OPEC’s past, present, and future to gain a better understanding of the organization and what role they play in the global oil market. Here are some important facts to know about OPEC. The Organization was created at the Baghdad Conference in September 1960, by Iran, Iraq, Kuwait, Saudi Arabia and Venezuela. The five Founding Members were later joined by nine other Members: Qatar, Indonesia (suspended its membership in November 2016); Libya United Arab Emirates; Algeria; Nigeria; Ecuador; Angola, and Gabon. Before OPEC was formed, the international oil market was dominated by the “Seven Sisters” – which was a group of large international oil companies.  The term was coined in the 1950s by businessman Enrico Mattei, then-head of the Italian state oil company Eni to describe the seven oil companies which formed the “Consortium for Iran” cartel and dominated the global petroleum industry from the mid-1940s to the 1970s. It was formed by the Anglo-Persian Oil Company, Texaco, Gulf Oil, Standard Oil of California, Royal Dutch Shell, Standard Oil of New Jersey and Standard Oil Company of New York. The international oil market dominated by the “Seven Sisters” multinational companies was largely separate from that of the former Soviet Union (FSU) and other centrally planned economies (CPEs). OPEC’s formation in 1960 occurred at a time of transition in the international economic and political landscape, with extensive decolonisation and the birth of many new independent states in the developing world. OPEC’s stated goal is “to co-ordinate and unify petroleum policies among Member Countries, in order to secure fair and stable prices for petroleum producers; an efficient, economic and regular supply of petroleum to consuming nations; and a fair return on capital to those investing in the industry.” OPEC has theoretically had a significant impact on worldwide oil prices. Typically, if OPEC reduces the production targets for its member nations, oil prices increase. In practice it is not an exact science, especially considering the often low levels of transparency within state owned oil markets. Production targets cannot be raised or lowered without a unanimous vote of OPEC members. This often leads to problems within the OPEC Cartel.

The Importance of Price and Cartel – Non-cartel behavior: Non-OPEC producers generally act differently than OPEC does. Most are controlled by the private sector -Price takers; they produce if profitable to do so; generally the incentive to collude with OPEC lacks; lifting costs are generally higher for non-OPEC producers; high prices bring greater non-OPEC production; low prices can result in collapse. OPEC members supply roughly 40% of the world’s oil and control between 75% and 80% of the world’s total proven crude reserves. The vast majority of OPEC’s reserves are located in Saudi Arabia and Venezuela, the latter has the largest proven oil reserves in the world. Together OPEC state they have over 1.2 Trillion barrels of oil in reserve. Over 25% of OPEC proven reserves are in Venezuela.

Herewith some important dates for both OPEC and NON-OPEC countries: 1960 1970:-the 1970s energy crisis was a period when the major industrial countries of the world, particularly the United States, Canada, Western Europe, Japan, Australia, and New Zealand, faced substantial petroleum shortages, real and perceived, as well as elevated prices. In the meantime, the non-OPEC share of global oil production hits a low of 48% in 1973. The 1970s High Oil Prices encouraged new investment in non-OPEC production; developed new exploration and production of new technologies, and an aggressive cost-reduction programs by industry; it attracted investment in areas previously considered uneconomical and eventual emergence of unconventional resources. 1973: due to the United States’ support of Israel in the Arab-Israeli Conflict of 1973, OPEC raised the cost of oil from $3 a barrel to $12 dollars a barrel causing gas shortages and rationing in Western nations. However it was only the Arab nations of OPEC that imposed an embargo on sales to allies of Israel.  The two worst crises of this period were the 1973 oil crisis (Yom Kippur War) and the 1979 energy crisis (Iranian Revolution) that triggered interruptions in Middle Eastern oil exports. Eventually OPEC broadened its mandate with the first Summit of Heads of State and Government in Algiers in 1975, that led to establish the OPEC Fund for International Development in 1976. Member Countries embarked on ambitious socio-economic development schemes. Membership grew to 13 by 1975. 1980-90: among the major non-OPEC producers in the seventies, North America is dominant, until in the eighties Mexico and North Sea become major exporters. After reaching record levels early in the decade, prices began to weaken, before crashing in 1986, responding to a big oil glut and consumer shift away from this hydrocarbon. The world price of oil, which had peaked in 1980 at over US$ 35 per barrel (equivalent to $101 per barrel today, when adjusted for inflation), fell in 1986 from $27 to below $10 ($58 to $22 today). The 1980s oil glut was a serious surplus caused by falling demand from slowed economic activity in industrial countries due to the crises of the seventies, as said especially in 1973 and 1979, and the energy conservation spurred by high fuel prices. OPEC’s share of the smaller oil market fell heavily and its total petroleum revenue dropped below a third of earlier peaks, causing severe economic hardship for many Member Countries. In 1986 the non-OPEC share of global oil production reaches a high of 71% and prices rallied in the final part of the decade, but to around half the levels of the early part, and OPEC’s share of newly growing world output began to recover. This was supported by OPEC introducing a group production ceiling divided among Member Countries and a Reference Basket for pricing, as well as significant progress with OPEC/non-OPEC dialogue and cooperation, seen as essential for market stability and reasonable prices. 1990 -2000: in the meantime, environmental issues emerged on the international energy agenda. Prices moved less dramatically than in the 1970s and 1980s, and timely OPEC action reduced the market impact of Middle East hostilities in 1990–91 when new production occurred from South America, West Africa, non-OPEC Middle East, and China. But excessive volatility and general price weakness dominated the decade, and the South-East Asian economic downturn and mild Northern Hemisphere winter of 1998–99 saw prices back at 1986 levels. Throughout 1980s and early 1990s, belief that OPEC would soon be regaining majority share of global oil production. However, despite several periods of relatively low prices, non-OPEC production has risen every year since 1993 and supply becoming increasingly diverse. A solid recovery followed in a more integrated oil market, which was adjusting to the post-Soviet world, greater regionalism, globalisation, the communications revolution and other high-tech trends. Breakthroughs in producer-consumer dialogue matched; continued advances in OPEC/non-OPEC relations. As the United Nations-sponsored climate change negotiations gathered momentum, after the Earth Summit of 1992, OPEC had to seek fairness, balance and realism in the treatment of oil supply.

An innovative OPEC oil price band mechanism helped strengthen and stabilise crude prices in the early years of the decade. 2000 -2016: but a combination of market forces, speculation and other factors transformed the situation in 2004, pushing up prices and increasing volatility in a well-supplied crude market. Oil was used increasingly as an asset class. Prices soared to record levels in mid-2008, before collapsing in the emerging global financial turmoil and economic recession. OPEC became prominent in supporting the oil sector, as part of global efforts to address the economic crisis. The global economy represented the main risk to the oil market early in the decade, as global macroeconomic uncertainties and heightened risks surrounding the international financial system weighed on economies. Escalating social unrest in many parts of the world affected both supply and demand throughout the first half of the decade, although the market remained relatively balanced. Prices were stable between 2011 and mid-2014, before a combination of speculation and oversupply caused them to fall in 2014. In the future Non-OPEC Production best estimates show demand increasing enough to keep price from dropping significantly, higher prices attract investment in areas previously considered uneconomical and the EIA (International Energy Agency) predicts (2006) that non-OPEC suppliers will retain their market share at least through 2030. Trade patterns continue to shift, with demand growing further in Asian countries and generally shrinking in the OECD (Organisation for Economic Co-operation and Development) . OPEC’s main competition is the Organization for Economic Co-operation and Development (OECD) which has 30 member nations and is involved in several different industries. It includes oil producers like the U.S., Canada, Mexico, and the U.K. The OECD accounts for approximately 23% of the world’s oil production. The world’s focus on multilateral environmental matters began to sharpen, with expectations for a new UN-led climate change agreement. OPEC continued to seek stability in the market, and looked to further enhance its dialogue and cooperation with consumers, and non-OPEC producers. As said, about 60% of the world’s current oil supply comes from non-OPEC countries , produced in wide variety of locations. However, most non-OPEC countries are not oil importers.

On November 30 2016, the 171th OPEC Conference took note of oil market developments since it last met in Algeria and reviewed the oil market outlook for the remainder of 2016 and 2017.  It observed that global economic growth forecasts were reasonable for both 2016 and 2017 at 2.9% and 3.1% respectively, that non-OPEC supply is expected to contract by 0.8 million barrels per day (mb/d) in 2016, before returning to growth of 0.3 mb/d in 2017, and that world oil demand is anticipated to grow at healthy levels of around 1.2 mb/d in both 2016 and 2017.

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